Interest rate spread of NBFIs drops to historic low

Infographic: TBS

The country's non-bank financial institutions (NBFIs) witnessed a historic low interest-rate spread at 0.16% last July, due to a number of reasons including the rise of classified loans and the interest rate cap imposed by the central bank.

Sector insiders said the lower interest rate spread (the difference between interest rates on loans and deposits) is eroding the profits of the NBFIs.

Analysing the Bangladesh Bank data, the interest rate spread of the NBFIs was observed to be more than 1% in March. But since then, the spread has been below 1% and has been steadily decreasing.

According to the central bank data, NBFIs are currently collecting deposits at an average interest rate of 8.02%. However, the interest rate on loans stands at 8.18%. Consequently, the interest rate spread for NBFIs has narrowed down to 0.16% in July.

In June, NBFIs were receiving an interest rate of 8.20% on loans, resulting in an interest rate spread of 0.27%.

"Since the introduction of NBFIs in our country, the interest spread was the lowest in July this year and it may decrease further," a senior official of the central bank, seeking anonymity, told The Business Standard. 

Stating that the NBFIs are not getting deposits as per the demand due to the central bank cap on the interest rate, the official said, "Deposits could not be collected at a rate of more than 7% in this sector for the past few years. In the new system launched last July, the process of determining the interest rate on deposits by adding a maximum of 2% with the six-month moving average rate of 182-day treasury bills (SMART) has begun. The lending rate is determined by adding 5% with SMART."

Currently, the maximum interest rate on deposits is 9.10% and the lending rate is 12.10%. However, NBFIs are not getting deposits that way as banks are offering interest rates on deposits at almost the same rate.

Kyser Hamid, managing director and CEO of Bangladesh Finance Ltd, told TBS that the average interest rate of NBFIs loans decreases due to the rise in non-performing loans. Consequently, this decline in loan rates leads to a decrease in the interest spread as well.

As per the central bank data, out of the 30 NBFIs currently operating in the country, 12 of them have negative interest spreads. People's Leasing and Financial Services, severely affected by the PK Halder loan scams, is experiencing the highest negative interest rate spread of 11.37%.

Central bank data shows that the number of NBFIs in negative spreads was 10 even a year ago. In the last one year, there have been two new additions. Due to these NBFIs in the negative, the sector's cumulative interest total spread is going negative.

Mentioning that NBFIs are not able to compete with banks to get deposits, the managing director of another NBFI said, "Many banks are now collecting deposits with interest rates close to 9%. As a result, we are not getting the deposit. There are many negative rumours about NBFIs. Due to these reasons, many good NBFIs are not getting enough deposits now."

In this situation, if the deposit interest is not allowed to increase, then the sector will face more difficulties, he said.

Pointing out that an NBFI must have at least a 3% spread to keep it running, the NBFI official said, "Currently even one institution does not have a comfortable interest spread. As a result, if this process continues for a long time, the condition of the sector will be more fragile."